Local Office Rent Dynamics
A Tale of Ten Cities
Published online: 7 May 2008
The Author(s) 2008
Abstract This study applies rent adjustment models for ten major European office
markets. We capture long-run equilibrium relationships of demand and supply
variables and their short-term corrections in a two equation error correction model.
We test whether the local nature of office markets makes a model based on national
economics inaccurate if local and national markets do not move in tandem. For this
we employ a unique dataset, which includes both disaggregated and national
variables to model changes in real prime rents for a group of premier and second tier
office market cities across Europe for the period 1990–2006. We explicitly compare
results that are derived from models that include different levels of geographic
aggregation. Results of the two stage error correction model indicate that
international office rents adjust to short-run changes in office related economic
activity, lagged rent changes, and to the deviation of rents from their long-run values.
At the same time our results offer no proof that error correction mechanism models
for office rents improve significantly by specifying economic growth figures beyond
the national aggregated level for the cities included in our analysis.
Keywords Office rents
Error correction models
Understanding rent dynamics across real estate cycles has been at the heart of the
real estate literature ever since Blank and Winnick (1953) provided a simple
theoretical framework in which residential rent changes were modeled as a function
of vacancy rates. Shilling et al. (1987) were among the firsts to apply this model to
explain local US office rents, while Wheaton and Torto (1988) estimated the model
J Real Estate Finan Econ (2009) 39:385–402
M. Jennen (*)
Finance Group, Rotterdam School of Management Erasmus University, Room T09-43, Burg.
Oudlaan 50, 3062 PA Rotterdam, The Netherlands